Timeline to claim Input Tax Credit of FY 25-26 – Part 2

Eligibility of ITC check

First of all the taxpayer must ascertain the eligibility of the Input Tax Credit (ITC) on his purchases, expenses and capital goods. For this the first criteria is taxability of his outward supply. It is clear that if outward supply (sales) is subject to GST, then the ITC on inward supply (purchase, expense, capital goods) is eligible to claim. It is also clear that to claim ITC , the invoice should be there with him (either physical copy or digital copy) , he should have received the goods or services, he has paid for the inward supply within 180 days and his supplier has actually paid the tax so collected from him into the government treasury.

The officer verifies the GSTR-3B filing date and tax mentioned in it. If the claim of ITC is lower the tax in 3B of the supplier then he assumes that supplier has paid the tax. If the tax in 3B is lower or 3B filing is not being done by the supplier, then the ITC of buyer is denied. Even though the buyer has paid the GST component along with the value of goods or service to his supplier, the ITC is denied on said ground.

This is because the government pass on the ITC to the buyer only when he receives the tax from supplier. On the contrary, when the supplier pay the tax to government without being collecting tax from his buyer , still the government don’t allow the buyer to claim ITC. This is because the buyer as not made payment to supplier within 180 days, being one of the condition to claim ITC.

In nutshell, the buyer carries the responsibility of ensuring the taxes are correctly paid both – by him to his supplier and by his supplier to the government.

Rule 42 and 43 reversal

Rule 42 talks about reversal of ITC used commonly for taxable and exempt goods. In this case, the ITC attributable to taxable outward supply is allowed to claim. Not just the purchases toward exempted goods are ineligible to claim ITC but services such as audit fees, admin office maintenance, stationery, legal advice for business as a whole, financial services availed etc. These inward supplies are commonly used for taxable and exempt outward supplies. In such case reversal of ITC proportionate to exempt supplies is required. Consider last year turnover to apportion the ITC into eligible and ineligible.

Section 17(5) – blocked ITC

It is generally said that GST assured seamless flow of credit. Yes, it is correct in the manner that ITC of IGST, CGST and SGST collectively eligible to offset against IGST, CGST and SGST liability. Though CGST ITC cannot be used to offset SGST liability and vice-versa.

In erstwhile tax regime the CENVAT credit was not allowed to offset against VAT payable.

There are list of expenses mentioned under section 17(5) of the CGST Act, 2017 of which the ITC is not allowed. They are –

1. motor vehicles having seating capacity of upto 13 seater, except –
   • when the motor vehicle is further supplied
   • used for transportation of passengers
   • imparting training on driving of motor vehicle
2. vessels and aircraft, except –
   • when the vessels , and aircraft are further supplied
   • transportation of passengers
   • imparting training on flying such aircraft
   • transportation of goods
3. following services connected to point 1 and 2, are not allowed to claim
   • general insurance
   • servicing
   • repair and maintenance
4. but when the same are used for the exceptions given at point 1 and 2 the ITC is eligible
5. food and beverages
6. outdoor catering
7. beauty treatment
8. health services
9. cosmetic and plastic surgery
10. leasing, renting or hiring of motor vehicles, vessels or aircraft , except when they are used for exceptions as referred at point 1 and 2
11. life insurance
12. health insurance
13. EXCEPTION: when inward supply is procured for further outward supply of same category of goods or services then ITC is eligible
14. membership of a club, health and fitness centre
15. travel benefit extended to an employees on vacation such as leave or home travel concession
16. EXCEPTION: when law obligates an employer to provide the same to employee then ITC is eligible
17. works contract services related to construction of immovable property , except Plant and machinery
18. goods or services procured for construction of immovable property , except plant and machinery
19. EXPLANATION:  “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property
20. ITC on inward supply not eligible when outward tax is paid under composition scheme (section 10)
21. inward supply received by non-resident taxable person, except imported by him
22. inward supply for CSR – Corporate Social Responsibility
23. inward supply for personal consumption
24. goods –
    • lost
    • stolen
    • destroyed
    • written off
    • gift
    • free samples
25. tax paid u/s 74 – willful short payment of tax, not payment of tax

Also read – Understanding Blocked Input Tax Credit (ITC) under GST in simplified manner

Opting for Composition Scheme

The composition scheme allows a taxpayer to pay GST at a lower rate. For manufacturer and trader it is 1% , for restaurant it is 5% and for services it is 6%. One of the condition for the composition taxpayer is that they cannot collect tax from their customer. They have to pay from their sales proceed itself. They also have to mention on their invoice as ‘Composition taxable person, not eligible to collect tax on supplies’. Also, the composition taxpayer cannot claim ITC on their inward supplies.

Taxpayer opting for composition scheme need to reverse the ITC on inputs, semi-finished goods and finished goods held in stock on the day immediately preceding the date of exercise of composition scheme. In respect of capital goods held in stock the ITC involved in the remaining useful life in months (considering as 5 years) shall be computed on pro-rata basis and need reversal.

FAQs – composition scheme

Debit Note

Debit note is delinked from their original document viz Tax invoice. Therefore, the timeline to claim ITC on debit note starts from the date of issuance of said debit note.

Again the debit note is subject to reversal u/r 42 between exempt and taxable supply, if exist.

Analysis of ITC in 2B

There are possibility that invoices populated in GSR-2B are not accounted in books of accounts. Call such invoices from vendor , account it , pay the total bill value and claim ITC on it.

There is also possibility of vendors uploading invoices under our GSTIN by mistake. In such cases, it appears that ITC eligible is available but it got lapsed. Contact such vendors and make them understand the implication and request for making necessary correction.

Cancelled GSTIN

It may happen the vendor from whom you have procured goods or availed services is now showing INACTIVE GSTIN in the common portal. The officer may easily reject the claim of ITC on such invoices.

In common portal see the GSTIN cancelled date and compare it with the invoice date. If the invoice was issued prior to cancellation of GSTIN then ITC is eligible. Keep the screen shot as an evidence that GSTIN of taxpayer was active when he has issued the invoice.

Electronic Credit Reversal and Reclaim Statement

ITC reversed temporarily via table 4(B)(2) gets parked in ‘electronic credit reversal and reclaim statement’. The list of such invoices need to be analysed. If they are now eligible for claim then claim it. If the discrepancy still exist then be the ITC in the said leger.

ITC once claimed and then reversed (temporarily) the re-claim of that ITC has no time line. So, no need to reverse ITC of previous year 2025-26 in October month GSTR-3B.

RCM invoices

Either scrutinise the list of invoices in 2B report of previous year 2025-26 or check books of accounts for the list of services. If found that tax is not paid on any invoice then pay it, raise self invoice and claim ITC in.

• Goods Transport Agency (GTA)
• Legal consultancy service
• service supplied by arbitral service
• service by way of sponsorship
• Service supplied by the Central Government, State Government, Union Territory or local authority
• Services supplied by the Central Government, State Government, Union Territory or local authority by way of renting of immovable property
• Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI)
• Long term lease of land (30 years or more) by any person against consideration in the form of upfront amount
• Services supplied by a director of a company or a body corporate to the said company or the body corporate
• Services supplied by an insurance agent to any person carrying on insurance business
• Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial compan
• Supply of services by an author, music composer, photographer, artist
• Supply of services by the members of Overseeing Committee to Reserve Bank of India
• Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs)
• Services provided by business facilitator (BF) to a banking company
• Services provided by an agent of business correspondent (BC) to business correspondent (BC)
• Security services (services provided by way of supply of security personnel) provided to a registered person: